08/11/2022

Central Bank of Malta publishes its fourth issue of its Quarterly Review for 2022

The Central Bank of Malta has published the fourth issue of its Quarterly Review for 2022. This edition analyses in depth the economic and financial developments in Malta and abroad during the second quarter of 2022.

Economic activity accelerated during the second quarter of the year, as real GDP rose by 8.9% on an annual basis, following an 8.1% increase in the previous quarter. Faster growth was underpinned by an increase in the contribution of net exports, which is now in line with that of domestic demand.

Potential output grew at a marginally faster pace. It stood at 5.1% in the second quarter of 2022, up from 5.0% in the previous quarter. The Bank's estimate of the output gap remained positive and widened, indicating an increase in the degree of over-utilisation of the economy's productive capacity. This reflects a strong recovery in activity in the context of labour shortages and other supply bottlenecks.

The Bank's Business Conditions Index fell, and stood closer to its historical average. This signals further normalisation in the pace of economic activity compared with the high rates registered in the first half of 2021.

The European Commission's Economic Sentiment Indicator edged down from the level recorded in the first quarter of the year, but remained above its long-term average and exceeded slightly the level recorded just before the pandemic.

Developments in the labour market remained positive. Employment levels and employment rates both rose in annual terms. Meanwhile, at 2.9% the unemployment rate stood unchanged from that registered in the previous quarter, and well below the rate of 3.4% recorded a year earlier. Malta's unemployment rate also remained below the average rate of 6.6% for the euro area.

Price pressures continued to build during the quarter. Annual inflation, as measured by the Harmonised Index of Consumer Prices, stood at 6.1% in June, above that of 4.5% recorded in March. Higher services inflation was the main driver behind the increase in inflation since March, although food and non-energy industrial goods prices also registered faster growth. Annual inflation based on the Retail Price Index - which only captures expenditure by Maltese residents - rose from 4.4% in March to 6.2% in June.

During the second quarter of 2022, the general government deficit narrowed in level terms when compared to that recorded in the corresponding period of 2021. When measured on a four-quarter moving sum basis, the general government balance registered a deficit of 6.9% of GDP, lower than the 7.8% recorded in the first quarter of 2022. Meanwhile, the general government debt-to-GDP ratio declined from 57.4% to 55.1% as at end-June 2022. Government's net financial worth as a share of GDP improved in the quarter under review.

The Review also presents an overview of the monetary policy decisions taken by the Governing Council of the European Central Bank. The Governing Council kept the key ECB interest rates unchanged during the second quarter of 2022. However, in June, it announced its intention to start raising key interest rates in July.

The Governing Council decided to end net asset purchases under the Asset Purchase Programme as of 1 July 2022. Within the same month, the Council decided that it will apply flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to preserving the functioning of the monetary policy transmission mechanism. In addition, it agreed to accelerate the completion of the design of a new anti-fragmentation instrument. The Governing Council also reiterated its intention to reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2024.

In July, the Governing Council lifted its key policy rates by 50 basis points. It also approved a new Transmission Protection Instrument. In September and October, the Governing Council also announced two rate increases of 75 basis points, raising the ECB's policy rates by a cumulative 200 basis points. The Council also indicated that it expected further increases in these rates going forward.

In October, the Council also changed the TLTRO-III terms and conditions starting from 23 November 2022, to make them consistent with the broader monetary policy normalisation process, and to reinforce the transmission of policy rate increases to bank lending conditions. It also set the remuneration on banks' minimum reserves held with the Eurosystem at the deposit facility rate, thereby bringing such remuneration closer to money market conditions.

Besides the standard economic analysis, the Review also analyses the Bank's new advertised house price index based on online sources and compares it with that based on print media. It also presents the results of a study of the trends and factors that influence the excess demand for banknotes in Malta from a Eurosystem and cross-country perspective. In addition, it reviews transactions at point-of-sale terminals in Malta between 2017 and 2021. Finally, it presents an article that assesses key trends and developments in the information and communication sector using different data sources.

The fourth issue of the Quarterly Review for 2022 is available on the Bank's website.

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